Editorial: More rock and roll for state economy

2012-12-12 15:29:27

The Rolling Stones are rocking on their "50 and Counting" anniversary tour that "You can't always get what you want." The California state government is learning that's the case with expected tax revenues.

Controller John Chiang just released data showing that state tax receipts for November were down 10.8 percent from what was expected in the fiscal 2012-13 state budget. That's a gap of $807 million. The big hit was a drop in income taxes of $843 million, or 19 percent. Oops.

"November's disappointing revenues stand in stark contrast to recent news that California is leading the nation in job growth, has significantly improved its cash liquidity to pay bills, and even long-distressed home values are starting to inch upward," Mr. Chiang said in a statement. "This serves as a sobering reminder that, while the economy is expanding, it is doing so at a slow and uneven pace that will require the state to exercise care and discipline in how its fiscal affairs are managed in the coming year."

We asked the controller's spokesman, Jacob Roper, if the impending "fiscal cliff" disaster for the federal government's finances could have hurt state revenues. "You couldn't necessarily determine that yet," he replied.

And given that income taxes especially were down, we wondered if wealthy people might be exiting the state to avoid the new top state tax rate of 13.3 percent, the highest in the nation, which voters chose by passing Proposition 30. "It's far too soon to know," he said, noting that the Prop. 30 sales tax doesn't take effect until Jan. 1. And although the higher income tax rate is retroactive to Jan. 1, 2012, "the vast majority [of the tax increase] won't come in until April 15" next year, when taxes are due, according to Roper.

But the higher tax rates actually are having an effect, Bill Watkins told us; he's the director of the Center for Research and Economic Forecasting at California Lutheran University. "The controller's office already is being surprised by the numbers coming in low. California still has to struggle with what size government it's willing to finance, and what is the most efficient way to fund it."

He also pointed to a new U.S. Census Bureau report showing that, "About 100,000 more Californians moved to another state in 2011 than California gained from other states," in the summary by the Sacramento Bee. The main destinations of the 562,343 Californians who left: Texas 58,992, Arizona 49,635, Nevada 40,114 and Washington 38,421. Note that, of those four states, three have no state income tax at all. And the fourth, Arizona, has a top rate of 4.54 percent, just under a third of California's top rate.

Mr. Watkins said of wealthy people, "When you change marginal tax rates, they move. These people have options. It's like in the 1970s, when the Rolling Stones left high-tax Britain for France." Ironically, in 2012 it's France whose new 75 percent top rate is chasing tax exiles to Britain, which now has a 45 percent top rate. When the numbers start coming in next year for California, Mr. Watkins said he expects state tax authorities will discover "they will have fewer tax returns and receipts than they expected."

Our fear is that, despite the Prop. 30 tax increase that supposedly will bring in another $5 billion, tax exiles will deny billions to state coffers. Then the Democrats' new supermajority in both houses of the Legislature will be tempted to make up the gap by increasing taxes and "fees" at will, sparking a downward budget spiral.

If that happens, the appropriate Stones song will be, "Gimme Shelter."